No Duty to Defend If No Fortuity and No Occurrence

Larry P. Schiffer | Insurance and Reinsurance Disputes Blog

So after just blogging about how tough it is to avoid the duty to defend, the Seventh Circuit issues an opinion concluding that where the underlying allegations lack fortuity and there is no occurrence, there is no obligation for the insurance company to defend.

In Lexington Insurance Co. v. Chicago Flameproof & Wood Specialties Corp., No. 19-1062 (7th Cir. Feb. 27, 2020), a lumber supplier was sued by a commercial contractor that ordered fire retardant and treated lumber (FRT lumber) required by the projects’ architects for several construction projects. The FRT lumber was required to meet the standards of the International Building Code (IBC). The allegations in the underlying suit are that the supplier purposely substituted uncertified lumber that did not meet the IBC standards, was not properly labeled, even though the purchase order was for a specific brand that met the IBC standards.

The supplier’s insurance company brought this action for a declaratory judgment that it had no duty to defend the underlying suits. The district court granted summary judgment to the insurance company holding that the insurance company had no duty to defend. The Seventh Circuit affirmed.

In affirming, the circuit court described the well-known provisions of a commercial general liability policy requiring the insurer to pay sums that the insured becomes legally obligated to pay as damages because of property damage caused by an occurrence, and defining an “occurrence” as “an accident.” The court held that the underlying complaints did not trigger the duty to defend because they did not allege an occurrence. Quoting from several Illinois cases, the court noted that if an injury is the rational and probable consequence of the act or the natural and ordinary consequence of the act, then the act is not an accident. In analyzing the underlying complaints, the court concluded that the allegations were inconsistent with shoddy workmanship or that the lumber shipped had a hidden defect resulting in damage that could not have been reasonably expected. Rather, said the court, the underlying complaints alleged that the supplier “deliberately shipped uncertified lumber despite knowing the consequences of doing so.”

The court essentially disregarded the negligent misrepresentation count in one of the complaints, stating that the label “negligent” is given little weight by courts and that courts focus on the actual allegations. Here, said the court, there was no unforeseen, sudden or unexpected event. There was no allegation that the supplier was negligent or failed to exercise reasonable care when it made its unilateral decision to ship uncertified lumber. Rather, the court found, the underlying complaints allege that the supplier did not exercise reasonable care by representing that it had the specific certified lumber requested by the contractor available for purchase, and by failing to notify the contractor that it supplied uncertified lumber. The court concluded that the alleged injury stemmed from the supplier’s unilateral decision to supply the uncertified lumber and its concealment of having done so.

Thus, the court affirmed the district court’s summary judgment in favor of the insurer finding that there was no duty to defend because the damage alleged was the natural and ordinary result of the supplier’s deliberate decision to supply, and conceal that it supplied, uncertified lumber.

In a footnote, the court mentioned that the supplier had not even addressed the insurance company’s argument that the policy’s business risk exclusions precluded coverage. Because the court determined that there was no “occurrence,” the court did not need to rely on the exclusion to resolve the appeal.

Inadvertent Construction Defects Are an ‘Occurrence’ Under the CGL Insurance Policy

Clifford J. Shapiro | Barnes & Thornburg

Whether property damage caused by defective construction work constitutes an accidental “occurrence” under the standard form Commercial General Liability (CGL) insurance policy is now highly dependent on which state’s law applies. Determining which state’s law applies to a particular construction defect claim is therefore critical and often outcome determinative.

The current status of each’s state’s law can be found in the Barnes & Thornburg Construction Law Practice Group’s 50 state survey of the “occurrence” issue.

This article discusses some of the correct and the incorrect ways that courts are currently addressing this issue. In particular, it focuses on the failed state of the law in Illinois, a state that continues to use an incorrect and outdated analysis to determine whether construction defects constitute an “occurrence” under the CGL insurance policy.

A majority of jurisdictions find that defective or faulty workmanship can constitute an “occurrence” under the modern day CGL insurance policy. Generally, these jurisdictions find that defective construction work that occurs unintentionally is a fortuitous “accident,” and therefore an “occurrence” within the meaning of the coverage grant in the CGL policy. Other jurisdictions find that unintentional defective work can constitute an accidental “occurrence” if the defective work causes property damage to something other than the defective work itself. In all of these jurisdictions, a policyholder can potentially trigger coverage for a construction defect claim, assuming other terms and exclusions in the policy do not apply to bar coverage.

A minority of jurisdictions still hold that construction defect claims do not, and cannot, give rise to an accidental “occurrence” within the meaning of the CGL insurance policy, and therefore refuse to provide any coverage at all for construction defect claims. This is the situation in Illinois, and frankly the law in Illinois needs to be corrected.

The modern day CGL insurance policy contains two key parts: the coverage grant and the policy exclusions. The coverage grant broadly provides insurance coverage up to the policy limits for amounts the policyholder becomes legally obligated to pay because of “property damage” caused by an accidental “occurrence.” The CGL policy then narrows and defines the actual scope of insurance coverage for a particular claim through the many policy exclusions.

The correct legal analysis recognizes that there is an accidental “occurrence” under the CGL policy coverage grant when a claim alleges that a general contractor or subcontractor caused property damage by accidentally (not intentionally) performing faulty construction work. Whether or not coverage exists for the claim is then determined by examining the various construction-specific policy exclusions that may apply to the particular situation.

The correct legal analysis then examines the kind of property damage at issue only as required by the analysis of the policy exclusions, and not to determine in the first instance if the claim involves an accidental “occurrence.” This is a very important difference. A threshold finding of no “occurrence” is an absolute bar to coverage, which means there is no possibility of coverage and therefore no duty to defend the policyholder against the claim.

On the other hand, a finding that the claim involves an accidental “occurrence” then requires analysis of the claim under the policy exclusions. This often leads to a finding that there is at least potential coverage for part of the claim, and the insurance company is therefore required to provide its policyholder with a defense at the carrier’s cost. As a result, the applicable law regarding the “occurrence” issue can, and often does, dramatically affect the policyholder’s financial posture for a construction defect claim.

A policyholder is more likely to have coverage in jurisdictions that recognize construction defects can be an “occurrence” and properly examine the applicable policy exclusions. For example, in the completed operations context, the “your work” exclusion generally applies to bar coverage for the cost to repair or replace property damage caused by the work of the policyholder, but it also has a specific “subcontractor exception” that does not bar coverage for property damage arising out of the work of the policyholder’s subcontractors. Thus, in a jurisdiction that recognizes that construction defects can be an accidental “occurrence,” a general contractor generally will have coverage for property damage caused by the work of its subcontractors.

While a subcontractor does not have the benefit of the subcontractor exception in the “your work” exclusion, a subcontractor can still have coverage under the correct analysis of the CGL policy if its work causes property damage to other work (i.e., property damage outside of the subcontractor’s own scope of work). The reason for this is not that the claim alleges an accidental “occurrence” because there is damage to other work. Rather, the correct conclusion is based on the “your work” exclusion, which generally excludes coverage for the cost to repair or replace the policyholder’s own defective work, but does not exclude the cost to repair or replace damage to other work.

The legal framework used by the Illinois courts is fundamentally flawed. In fact, it fails to apply the terms of the CGL insurance policy as intended by the insurance companies themselves.

Illinois decisions currently hold (incorrectly) that inadvertent construction defects cannot be an “occurrence” unless the defective work causes property damage to something other than the “project,” “building” or “structure.” Most, but not all, of these decisions address the coverage question in situations where the policy holder was a general contractor. The cases find that there can never be an “occurrence” – and that there is therefore no insurance coverage at all for the claim – if the alleged property damage was to any property within the general contractor’s scope of work. Because the general contractor’s scope of work usually includes construction of the entire building or project, this analysis finds that a CGL insurance policy provides no coverage at all to a general contractor for any claim that involves property damage to the building or project. This virtually eliminates insurance coverage for construction defect claims for general contractors. Under this analysis, there can only be insurance coverage if the claim includes property damage to something other than the project or building being constructed.

Among other things, this analysis fails to apply the “your work” exclusion as intended by the insurance contract. The correct legal analysis recognizes that there would be no reason to have an exclusion for property damage caused by the “work” of the policyholder if the “occurrence” requirement in the coverage grant did not allow any possible coverage for property damage caused by inadvertent construction defects in the first place. And there would certainly be no reason for the same exclusion to have an exception that specifically restores coverage for property damage caused by the policyholder’s subcontractors if there never could have been an accidental “occurrence” within the meaning of the policy’s coverage grant in the first place. In short, the Illinois analysis makes the “your work” exclusion essentially meaningless.

Unfortunately, the incorrect analysis is now very established in Illinois. For more than twenty years, Illinois appellate courts have repeatedly applied the incorrect analysis to deny insurance coverage for construction industry policyholders facing construction defect claims, and the Illinois Supreme Court has never decided the issue. Illinois appellate court cases continue to hold that there can never be an “occurrence” if the policyholder is a general contractor and the alleged damage was to any part of the project or building itself. As a result, Illinois decisions continue incorrectly to collapse what should be a second and separate analysis of coverage under the applicable policy exclusions (including the “your work” exclusion) into the initial threshold coverage determination of whether the claim involves an accidental “occurrence.”

Illinois decisions also continue to disregard or fail to apply the well accepted requirement that an insurance policy must be read and interpreted as a whole. Instead of applying the “your work” exclusion as intended, Illinois decisions often simply state that the legal analysis does not need to even consider the “your work” exclusion. The decisions find that construction defect claims for property damage within the policyholder’s scope of work are simply not sufficiently “fortuitous” or “accidental” to constitute an “occurrence.” This reasoning is based on an outdated judicial gloss that is not found in the insurance policy itself. It is based on old reasoning used by certain courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes to the policy modified the exclusions (including the “your work” exclusion) to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship, and that the scope of that coverage is found in the policy exclusions.

Illinois Coverage for Subcontractors: Correct Result, Wrong Analysis

Until recently, there was uncertainty whether the same incorrect “scope of work” analysis for the “occurrence” issue would be applied in Illinois to claims against subcontractors. Some federal decisions held that there could be an “occurrence” if the subcontractor’s defective work caused property damage to some other part of the project or building outside of its scope of work. But other decisions held that the subcontractor, like the general contractor, could not show the existence of any accidental “occurrence” if the claim involved property damage to any part of the entire project or building.

On March 29, 2019 the First District of the Illinois Appellate Court issued an opinion in Acuity Insurance Co. v. 950 W. Huron Condominium Association that directly answers the “occurrence” question for insured subcontractors. The decision finds that a subcontractor can have insurance coverage for an inadvertent construction defect claim under a CGL policy in Illinois if the claim involves property damage to a part of the project that is outside of the subcontractor’s scope of work. A 2017 Seventh Circuit decision in Westfield Ins. Co. v. National Decorating Service also finds that a general contractor can have coverage under its subcontractor’s insurance policy as an additional insured where the general contractor is being sued for defective work performed by its subcontractor that caused damage to property outside of the subcontractor’s scope of work.

Applying Illinois’ flawed analysis, Acuity and Westfield essentially arrive at the correct outcome for claims that involve resulting property damage caused by subcontractors – but for an absolutely wrong reason. Worse, the decisions do nothing to remedy current Illinois law that continues to deny coverage for general contractors even when the claim involves property damage that arises out of the work of subcontractors. Under that law, the general contractor who worked on the same project at issue in Acuity would not be able to obtain any insurance coverage for the loss under its own CGL policy even if the claim involved the exact same property damage caused by the same subcontractor. This is absurd, as the subcontractor exception in the “your work” exclusion should apply in this circumstance to allow coverage for the general contractor under these circumstances.

Similarly, while the insured subcontractor in the Acuity case should have insurance coverage for part of the cost to repair the property damage, it is not because the existence of property damage outside of the subcontractor’s scope of work somehow created an “occurrence.” Instead, the “occurrence” requirement in the policy was satisfied by the accidental and inadvertent nature of subcontractor’s defective work, and the scope of coverage for the claim should have been determined by the applicable policy exclusions. Here, the subcontractor’s defective work itself should be excluded from coverage under the “your work” exclusion in the subcontractor’s CGL policy. But that exclusion does not apply to the resulting property damage to the other non-defective parts of the work, including the damage that the subcontractor caused to other parts of the project. It is for this reason, and not because the claim somehow fails to allege an accidental “occurrence,” that the subcontractor has coverage for the resulting damage it caused to other parts of the project.

Will Illinois Law Ever Be Corrected?

The Acuity case presented a rare opportunity for the Illinois Supreme Court to reconsider and correct Illinois law, but unfortunately the court recently refused to accept the opportunity to decide the case on appeal. Illinois therefore continues to have an incorrect analysis in its case law for determining whether construction defect claims are covered by the CGL insurance policy. The Illinois Supreme Court needs to consider this issue and publish a decision that finally addresses and corrects the law in Illinois, or the Illinois legislature needs to take up and pass corrective legislation.

Illinois Appellate Court Clarifies What Is and Is Not an “Occurrence” in the Construction Defect Context

Marianne Bradley and Anthony Miscioscia |White and Williams

On December 31, 2019, the First District Illinois Appellate Court issued its decision in Owners Insurance Company v. Precision Painting & Decorating Corporation, clarifying what does and does not constitute “property damage” caused by an “occurrence” in the construction defect context. 2019 IL App. (1st) 190926-U, 2019 Ill. App. Unpub. Lexis 2425.

The underlying case involved allegations of negligence, consumer fraud and breach of contract. In particular, the underlying homeowner claimants alleged that Precision Painting & Decorating Corporation (Precision), whom the homeowners had hired to perform certain exterior paintwork at their home, failed to conform to U.S. Environmental Protection Agency (EPA) regulations with respect to the presence of lead-based paint. In its contract, Precision had agreed to take special care with respect to containing lead dust while working on the homeowners’ property. Despite having agreed to do so, Precision (allegedly) took almost no precautions, resulting in significant contamination to the interior of the home.

Owners Insurance Company (Owners) had issued Precision a CGL policy, providing coverage for “property damage” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Precision tendered its defense to Owners. Owners filed a DJ Action arguing that it owed no duty to defend as the homeowners had failed to allege any “property damage” caused by an “occurrence.” Specifically, Owners argued that, under Illinois law, damages resulting from an insured’s breach of contract are not recoverable under a CGL policy.

The trial court agreed, finding that no “accident” or “occurrence” was alleged. The trial court observed that the homeowners’ contract with Precision had specifically provided for various EPA-required precautions with respect to the use of lead-based paint. The trial court concluded that Precision’s failure to implement those precautions was not an “accident,” which in the trial court’s view, referred to something “unforeseen or untoward or disastrous.” Instead, the trial court characterized Precision’s conduct as nothing more than a foreseeable breach of contract.

Precision appealed, and the Appellate Court reversed and remanded. The Appellate Court found that the trial court’s focus on foreseeability was misplaced. It observed that: “[i]nstead of focusing on the foreseeability of the event itself (the release of lead-based particles), or even generally the damages (lead contamination),” Illinois case law instructs courts “to focus on what, specifically, was damaged, and whether the remediation of that damage fits within the general purpose of a CGL policy.” Id. at *12 (emphasis added). The Appellate Court emphasized that: “when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident.’” Id. at *14.

The Appellate Court was careful to contrast these so-called “beyond” damages with damages arising out of faulty workmanship, alone. It reiterated that it is well-settled under Illinois law that “there is no occurrence when a [contractor’s] defective workmanship necessitates removing and repairing work.” Id. at *14. This is true even when a contractor’s faulty workmanship results in consequential damages to any other part of the project for which the contractor has responsibility, as it remains part of the contractor’s work product. However, where damages extend beyond the scope of a contractor’s work product, the court concluded that those damages are more properly classified as unforeseeable accidents, and thus “occurrences.”

The Appellate Court found that Precision’s “work product” was limited to the exterior of plaintiffs’ house. Thus, any damage to the interior of the home, as well as to the surrounding land, was outside the scope of Precision’s project. Because plaintiffs had alleged damages “beyond repair and replacement, and beyond damage to other parts of the same project over which [Precision] was responsible,” plaintiffs had satisfactorily alleged “property damage” caused by an “occurrence.” The Appellate Court reversed and remanded in accordance with those findings.

Illinois Appellate Court Clarifies What Is and Is Not an “Occurrence” in the Construction Defect Context

Marianne Bradley and Anthony Miscioscia | White and Williams LLP

On December 31, 2019, the First District Illinois Appellate Court issued its decision in Owners Insurance Company v. Precision Painting & Decorating Corporation, clarifying what does and does not constitute “property damage” caused by an “occurrence” in the construction defect context. 2019 IL App. (1st) 190926-U, 2019 Ill. App. Unpub. Lexis 2425.

The underlying case involved allegations of negligence, consumer fraud and breach of contract. In particular, the underlying homeowner claimants alleged that Precision Painting & Decorating Corporation (Precision), whom the homeowners had hired to perform certain exterior paintwork at their home, failed to conform to U.S. Environmental Protection Agency (EPA) regulations with respect to the presence of lead-based paint. In its contract, Precision had agreed to take special care with respect to containing lead dust while working on the homeowners’ property. Despite having agreed to do so, Precision (allegedly) took almost no precautions, resulting in significant contamination to the interior of the home.

Owners Insurance Company (Owners) had issued Precision a CGL policy, providing coverage for “property damage” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Precision tendered its defense to Owners. Owners filed a DJ Action arguing that it owed no duty to defend as the homeowners had failed to allege any “property damage” caused by an “occurrence.” Specifically, Owners argued that, under Illinois law, damages resulting from an insured’s breach of contract are not recoverable under a CGL policy.

The trial court agreed, finding that no “accident” or “occurrence” was alleged. The trial court observed that the homeowners’ contract with Precision had specifically provided for various EPA-required precautions with respect to the use of lead-based paint. The trial court concluded that Precision’s failure to implement those precautions was not an “accident,” which in the trial court’s view, referred to something “unforeseen or untoward or disastrous.” Instead, the trial court characterized Precision’s conduct as nothing more than a foreseeable breach of contract.

Precision appealed, and the Appellate Court reversed and remanded. The Appellate Court found that the trial court’s focus on foreseeability was misplaced. It observed that: “[i]nstead of focusing on the foreseeability of the event itself (the release of lead-based particles), or even generally the damages (lead contamination),” Illinois case law instructs courts “to focus on what, specifically, was damaged, and whether the remediation of that damage fits within the general purpose of a CGL policy.” Id. at *12 (emphasis added). The Appellate Court emphasized that: “when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident.’” Id. at *14.

The Appellate Court was careful to contrast these so-called “beyond” damages with damages arising out of faulty workmanship, alone. It reiterated that it is well-settled under Illinois law that “there is no occurrence when a [contractor’s] defective workmanship necessitates removing and repairing work.” Id. at *14. This is true even when a contractor’s faulty workmanship results in consequential damages to any other part of the project for which the contractor has responsibility, as it remains part of the contractor’s work product. However, where damages extend beyond the scope of a contractor’s work product, the court concluded that those damages are more properly classified as unforeseeable accidents, and thus “occurrences.”

The Appellate Court found that Precision’s “work product” was limited to the exterior of plaintiffs’ house. Thus, any damage to the interior of the home, as well as to the surrounding land, was outside the scope of Precision’s project. Because plaintiffs had alleged damages “beyond repair and replacement, and beyond damage to other parts of the same project over which [Precision] was responsible,” plaintiffs had satisfactorily alleged “property damage” caused by an “occurrence.” The Appellate Court reversed and remanded in accordance with those findings.

PA Superior Court Provides Clarification on Definition of CGL “Occurrence” When Property Damage Is Caused by Faulty Building Conditions

Anthony L. Miscioscia and Konrad R. Krebs | White and Williams | July 25, 2019

The standard for an “occurrence” under a commercial general liability (CGL) insurance policy has been addressed on several occasions by Pennsylvania courts when an insured has allegedly performed faulty workmanship on a construction project. Specifically, in Pennsylvania, a claim for damages arising from an insured’s performance of faulty workmanship pursuant to a construction contract, where the only damage is to property supplied by the insured or worked on by the insured, does not constitute an “occurrence” under the standard commercial general liability insurance policy definition. But what about the circumstance when the insured has failed to perform contractual duties where the claim is for property damage to property not supplied by the insured or unrelated to the service the insured contracted to provide? The Pennsylvania Superior Court recently addressed this question in Pennsylvania Manufacturers Indemnity Co. v. Pottstown Industrial Complex LP, No. 3489 EDA 2018, 2019 Pa. Super. 223, 2019 Pa. Super. LEXIS 729* (Pa. Super. 2019).

Pottstown Industrial Complex arose out of an underlying dispute between a landlord and a commercial tenant who had leased space to store its product inventory. The tenant alleged that the landlord was responsible under the lease for keeping the roof “in serviceable condition in repair.” Notwithstanding this responsibility, the tenant alleged that the landlord failed to properly maintain and repair the roof, resulting in leaks and flooding during four separate rainstorms, destroying over $700,000 in inventory. The tenant specifically alleged that the floods were caused by poor caulking of the roof, gaps and separations in the roofing membrane, undersized drain openings, and accumulated debris and clogged drains.

The insurer filed a declaratory judgment action, seeking a determination that there was no coverage under a commercial general liability policy issued to the landlord. Following a motion for judgment on the pleadings, the trial court entered an order in favor of the insurer, holding that allegations of inadequate roof repairs were claims for faulty workmanship and were not covered under Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006) and Millers Capital Insurance Co. v. Gambone Brothers Development Co., 941 A.2d 706 (Pa. Super. 2007).

In its opinion, the Superior Court reversed the decision of the trial court, holding that the tenant had alleged a covered “occurrence” under the commercial general liability policy.[1] The Superior Court noted that Kvaerner and Gambone only precluded the finding of an “occurrence” where a claim is for damage to property supplied by the insured, where the only property damage is the product or property that the insured supplied or on which it worked, or where the damages sought are for the insured’s failure to deliver the product or perform the service it contracted to provide. The Superior Court distinguished Pottstown Industrial Complex from Kvaerner and Gambone on the grounds that those cases only alleged damage to the property that the insured had worked on or supplied, while the Pottstown Industrial Complex underlying plaintiffs sought to recover for damage to their own property, stored on the ground of the insured’s facility, rather than damage to the insured’s faulty roof. The Superior Court held that this interpretation of the term “occurrence” was consistent with Kvaerner’s rationale that the term “occurrence” was not to be construed to “convert [a commercial and general liability policy] into a performance bond,” but rather, to provide insurance for the risk of “damage the insured causes to another person’s property.”


[1] “Occurrence” is defined as “an accident”